Distress & Turnarounds

Directors Duties Near Insolvency

Know exactly what changes for a board as the money runs out: what the law actually requires, what it does not, and which decisions put a director's own assets on the table.

  • Advanced
  • 10 min total
  • 12 chapters

What decision this helps you make: Whether to keep trading, who may be paid, and what has to be recorded, in the window between "we have a problem" and "we have filed".

What this topic is

The set of duties, exposures, and procedural habits that apply to directors when a company approaches or reaches insolvency. It spans three separate bodies of law that most people blur together: fiduciary duty under corporate law, avoidance powers under insolvency law, and a short list of statutes that impose personal liability on individuals directly.

Why it matters

This is the one area of corporate law where the wrong decision is paid for out of a director's own bank account. The decisions that create that exposure (pay this creditor and not that one, take one more customer deposit, hold off on payroll taxes for a fortnight) look like ordinary cash management at the time, and only become legal events with hindsight.

Who should learn it

Directors and officers of companies under strain, founder-CEOs who are also guarantors, investors holding board seats, advisers to distressed businesses, and anyone about to accept a seat on a board whose runway is short.

What you will understand

  • What "duties shift to creditors" actually means in Delaware, and why the popular version is wrong
  • The English creditor duty after the Supreme Court settled it in 2022
  • Which payments in the run-up become recoverable, and from whom
  • The statutes that reach a director personally regardless of the corporate form

Prerequisites

Common misconception

"Once we enter the zone of insolvency, our duties switch from shareholders to creditors." In Delaware that is not the law and has not been since 2007. Directors continue to owe their duties to the corporation. What changes on actual insolvency is who has standing to enforce them: creditors become the residual claimants and may sue derivatively, on the company's behalf. The Delaware Supreme Court expressly refused to give creditors a direct claim, even in the zone of insolvency, precisely because a board asked to serve two masters serves neither.